It means that you have to accept the person you love just the way they are and not force them to change because that's like killing them. If he had forced her to take the ribbon off he wouldn't have such a happy life with her.
This was my favorite scary story as a kid, only with a few altercations in it. First the ribbon came off one night after they married when he tried to sneak it off her while she slept, and second when he head came off she started crying, but her tears were black.
What a... Lovely story...